Foreign Exchange Rate-Trade Balance Nexus in Sub-Saharan Africa
Abstract
We examine the nexus between foreign exchange rate (FER) and trade balance in Sub-Saharan Africa (SSA). We utilize balanced annual panel data for 20 SSA countries spanning 2005–2024, sourced from the World Bank. To address endogeneity, unobserved country-specific effects, and dynamic panel bias, we apply the Generalized Method of Moments (GMM) estimator. Results reveal significant persistence in trade balance, with the lagged coefficient (0.215576) indicating that about 21.6% of past trade balance conditions persist into the current period, reflecting partial adjustment and structural inertia. Crucially, FER exhibits a negative and statistically significant effect (?0.899849), implying that a 10% depreciation leads to an approximate 9% deterioration in the trade balance, ceteris paribus. This contradicts the Marshall–Lerner condition and underscores the dominance of import dependence, weak export diversification, and structural rigidities in SSA economies. We conclude that currency depreciation is counterproductive to external balance in SSA. We therefore advocate for strong and stable currencies, alongside policies promoting export diversification, domestic production, and structural transformation to achieve sustainable trade balance outcomes.
Downloads
References
Agenor, P. R. (1991). Output, devaluation, and the real exchange rate in developing countries. Review of World Economics, 127(1), 18-41.
Alexander, S. S. (1952). Effects of a Devaluation on a Trade Balance. Staff Papers-International Monetary Fund, 2(2), 263-278.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data. Review of Economic Studies, 58(2), 277–297.
Arize, A. C., Osang, T., & Slottje, D. J. (2000). Exchange-rate volatility and foreign trade: evidence from thirteen LDCs. Journal of Business & Economic Statistics, 18(1), 10-17.
Austen, R. A. (1987). African economic history: Internal development and external dependency.
Bahmani-Oskooee, M., & Gelan, A. (2012). Is there a J-Curve effect in Africa?. International Review of Applied Economics, 26(1), 73-81.
Bahmani-Oskooee, M., & Niroomand, F. (1998). Long-run price elasticities and the Marshall–Lerner condition revisited. Economics Letters, 61(1), 101-109.
Bahmani-Oskooee*, M., & Ratha, A. (2004). The J-curve: a literature review. Applied economics, 36(13), 1377-1398.
Baltagi, B. H. (2021). Econometric Analysis of Panel Data (6th ed.). Springer.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.
Bowsher, C. G. (2002). On Testing Overidentifying Restrictions in Dynamic Panel Data Models. Economics Letters, 77, 211-220.
Curtin, P. D. (1984). Cross-cultural trade in world history. Cambridge University Press.
Edwards, S. (1988). Real and monetary determinants of real exchange rate behavior: Theory and evidence from developing countries. Journal of Development Economics, 29(3), 311-341.
Elbadawi, I. (1994). Estimating long-run equilibrium real exchange rates. World Bank Policy Research Working Paper.
Frenkel, J. A., & Johnson, H. G. (1976). The Monetary Approach to the Balance of Payments. University of Toronto Press.
Hopkins, A. G. (1973). An Economic History of West Africa. Columbia University Press.
Krugman, P. R., & Obstfeld, M. (2009). International Economics: Theory and Policy (8th ed.). Pearson.
Musila, J. W., & Newark, J. (2003). Does currency devaluation improve the trade balance in the long run? Evidence from Malawi. African Development Review, 15(2?3), 339-352.
Nahabwe, P. K. J., Kagarura, W. R. & E. F. Munyambonera (2025). Foreign Direct Investment and Trade Balance in Sub-Saharan Africa. International Journal of Southern Economic Light, 13(1), 1-13.
Nahabwe, P. K. J., Kagarura, W. R. & E. F. Munyambonera (2025). Foreign Exchange Rates and Trade Balance in Sub-Saharan Africa. International Journal of Global Economic Light, 11(1), 1-12.
Nahabwe, P. K. J., Kagarura, W. R. & E. F. Munyambonera (2025). Government Expenditure and Trade Balance in Sub-Saharan Africa. EPRA International Journal of Economic Growth and Environmental Issues, 13(1), 15-28.
Nahabwe, P. K. J., Kagarura, W. R. & E. F. Munyambonera (2025). Mediation role of Exports as a capacity to Import, Inflation, and GDP growth on Trade Balance in Sub-Saharan Africa. EPRA International Journal of Economics, Business and Management Studies, 12(1), 51-65.
Nahabwe, P. K. J., & Kagarura, W. R. (2026). Foreign Direct Investment and Exports as A Capacity to Import Vis-À-Vis Trade Balance in Sub-Saharan Africa. Journal of Economics and Behavioral Studies, 17(4(J), 75-87. https://doi.org/10.22610/jebs.v17i4(J).4796
Nahabwe, P. K. J., & Kagarura, W. R. (2026). Foreign Exchange Rate and GDP Growth Vis-À-Vis Trade Balance in Sub-Saharan Africa. Journal of Economics and Behavioral Studies, 18(1(J), 28-41. https://doi.org/10.22610/jebs.v18i1(J).4798
Nahabwe, P. K. J., & Kagarura, W. R. (2026). Government Expenditure and Inflation Vis-À-Vis Trade Balance in Sub-Saharan Africa. Journal of Economics and Behavioral Studies, 18(1(J), 59-74. https://doi.org/10.22610/jebs.v18i1(J).4799
Onafowora, O. (2003). "Exchange rate and trade balance in East Asia: is there a J-curve?" Economics Bulletin, AccessEcon, 5(18), 1-13.
Prebisch, R. (1950). The Economic Development of Latin America and Its Principal Problems. United Nations.
Ricardo, D. (1817). On the Principles of Political Economy and Taxation. John Murray.
Roodman, D. (2009). A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics, 71(1), 135–158.
Rose, Andrew (1991), The role of exchange rates in a popular model of international trade: Does the ‘Marshall–Lerner’ condition hold? Journal of International Economics 30, 301-316.
Salvatore, D. (2016). International economics (12th ed.). Wiley.
Singer, H. W. (1975). The distribution of gains between investing and borrowing countries. In The strategy of international development: Essays in the economics of backwardness (pp. 43-57). London: Palgrave Macmillan UK.
Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan and T. Cadell.
Stiglitz, J. E. (2002). Globalization and its discontents. WW Norton & Company. Trad. La Grande Illusion Fayard.
Wooldridge, J. M. (2010). Econometric Analysis of Cross-Section and Panel Data (2nd ed.). MIT Press.
Copyright (c) 2026 Patrick Kagambo John Nahabwe, Willy Rwamparagi Kagarura, Benjamin Musiita
This work is licensed under a Creative Commons Attribution 4.0 International License.
Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of a revised paper in the light of suggestions of the reviewers, editorial team edits and formats manuscripts to bring uniformity and standardization in published material.
This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.
